Question
Toxaway Company is a merchandiser that segments its business into two divisionsCommercial and Residential. The companys accounting intern was asked to prepare segmented income statements
Toxaway Company is a merchandiser that segments its business into two divisionsCommercial and Residential. The companys accounting intern was asked to prepare segmented income statements that the companys divisional managers could use to calculate their break-even points and make decisions. She took the prior months companywide income statement and prepared the absorption format segmented income statement shown below:
Total Company | Commercial | Residential | |
---|---|---|---|
Sales | $ 1,035,000 | $ 345,000 | $ 690,000 |
Cost of goods sold | 676,200 | 179,400 | 496,800 |
Gross margin | 358,800 | 165,600 | 193,200 |
Selling and administrative expenses | 316,000 | 142,000 | 174,000 |
Net operating income | $ 42,800 | $ 23,600 | $ 19,200 |
In preparing these statements, the intern determined that Toxaways only variable selling and administrative expense is a 10% sales commission on all sales. The companys total fixed expenses include $58,500 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $88,000 of fixed expenses that would disappear if the Commercial segment is dropped, and $66,000 of fixed expenses that would disappear if the Residential segment is dropped.
Required:
1. Do you agree with the interns decision to use an absorption format for her segmented income statement?
2. Based on a review of the interns segmented income statement.
a. How much of the companys common fixed expenses did she allocate to the Commercial and Residential segments?
b. Which of the following three allocation bases did she most likely used to allocate common fixed expenses to the Commercial and Residential segments: (a) sales, (b) cost of goods sold, or (c) gross margin?
3. Do you agree with the interns decision to allocate the common fixed expenses to the Commercial and Residential segments?
4. Redo the interns segmented income statement using the contribution format.
5. Compute the companywide break-even point in dollar sales.
6. Compute the break-even point in dollar sales for the Commercial Division and for the Residential Division.
7. Assume the company decided to pay its sales representatives in the Commercial and Residential Divisions a total monthly salary of $16,500 and $33,000, respectively, and to lower its companywide sales commission percentage from 10% to 5%. Calculate the new break-even point in dollar sales for the Commercial Division and the Residential Division.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started